The Changing Face of Channel Partners

Posted: 09/2002

The Changing Face of Channel Partners

By Tara Seals

IT SEEMS LIKE EVERYONE'S HANGING out at the same club these days. End users are creating a buzz around converged, IP-based solutions and technology, attracting carriers, RBOCs, enhanced services companies and equipment vendors to rub shoulders on the same dance floor.

The party's just getting started, but agents and VARs may find themselves stuck with last year's business model if they don't learn to adapt to the new environment. VARs are earning commissions and are turning to value-added services to beat the margin crunch on hardware, while agents learn about hardware and systems integration to provide solutions-based value to their end users. In many ways, say some, agents and VARs will begin to share a business model as the worlds of telephony and IT collide.

Emerging technologies revolving around IP are beginning to appeal to end users in ever-increasing droves, and suppliers are rushing to meet the demand. "Every major manufacturer is planning or has already rolled out a product set, and we believe that over 40 percent of major corporations already have started to pilot or deploy IP telephony," says Edison Peres, vice president of emerging technologies, worldwide channels, at Cisco Systems Inc. "About 10 percent of the voice market is IP telephony, so it's still relatively small, but the fastest growing segment at 40 to 50 percent a year, while TDM is declining."

Application deployments are on the rise, such as law offices with telephones that automatically log the number of minutes spent with a particular client into computer billing systems and nurses' stations with telephones that record medication levels and frequency. Teachers soon may have telephones that take attendance and contact centers will be more efficient.

"These new XML apps open up new opportunities to add value, and change the way people do business," says Peres. "At the end of the day people buy technical solutions because of the applications."

End users also enjoy productivity gains by consolidating voice and data infrastructure into one, IP-based system. "So now the voice system is application-ready, and you get a return on the investment because you've cut out a significant amount of cost from your daily operations," says Joe Heinzen, vice president of engineering and professional services at value-added distributor Comstor Inc. "It's a double benefit for those looking for a chance to be more competitive."

Qwest Communications International Inc. has banked on growing user demand by launching Qwest Solutions, a new business unit created from several US West and Qwest legacy departments, which provides bundled and customized offerings to help enterprises migrate from legacy to converged systems via direct and indirect channels. Comprising professional services, network and application management, hardware and software services, Qwest Solutions offers practice areas for planning, execution and ongoing management of the transition to IP: business applications, computing solutions, contact center, enterprise networking, security and telephony and convergence, all under the Qwest Solutions' motto, "design, build and run."

"Customers, as they are looking at their next generation of technology, are wondering how to take advantage of the promise of IP transformation, and that's where we're trying to play a significant role -- in the transformation of IP services," says Alex Danyluk, senior director of Qwest Solutions. "People are focusing on leveraging the 'Webification' they've gone through, and convergence is occurring all over the place."

The Makeover

Squeezed hardware margins for VARs and end-user pressure on agents to provide more than circuits are driving a search for new opportunities in the converged marketplace. VARs are finding commission opportunities and agents are adding value to their services sales.

There is no margin left in hardware, say VARs. Mark Wagner, CEO of AllSwitch LLC, says he's turned to selling used equipment. "Everybody's going for convergent systems where they combine voice and data, that's why the Lucent Excel Switch with a Cisco router combination is hot," says Wagner. Even so, Wagner will go to bankruptcy sales, auctions, Internet swap mart eBay and other sources to buy used equipment for his customers. He has added value to his proposition by working directly with end users and equipment sources. "We're having immense success," he says.

Herb Levitin, president of Powercom, says he's evolved from VAR to agent in his 13 years in the industry. "We now use the hardware as a value-add since the margins are zero," he explains. "If there's voice and data integration, it gets complicated; there are all sorts of questions to add and every client's CPE is different, and you're dealing with intricate details of a network, so we give the consulting away for free to get the services."

In the VAR model, many partners make up for poor margins by selling consulting or labor. "Customers are very hesitant to get charged for consulting. The budget's so tight, they just want to know what they can do to save money," explains Levitin. "The real model is ultimately to make residual income as an agent; I want their services because it's a three-year contract and it's residual commission, and that's worth a lot more than a little bit of hardware."

Cisco and Hewlett-Packard Co. are trying to make that transition easier by offering their products in a residual compensation model, giving VARs an opportunity to break out of the low-margin, high-volume grind. "We don't anticipate it being the majority of the sales, but we think there's a niche in the market that sees an agent model as an opportunity and it's starting to work," says Peres of Cisco's e-Agent program.

"We're finding that for the VAR, their margins increase because they don't have to carry the accounts receivable for 45 to 60 days, and they don't have to buy the equipment," he adds.

HP offers VARs the opportunity to buy PCs and other products in an agent model. About 10 percent of HP PCs are being sold for commission, but the company goal is to push that up to around 50 percent. Commissions are 4 percent to 12 percent, depending on the product.

Other agreements that bring carrier services together with equipment also offer residual compensation for VARs. Sprint Corp. for example, has signed agreements with Cisco and Nortel Networks Inc. that give Sprint partners access to hardware and to offer services via the equipment providers' VARs that would receive commissions from selling Sprint services.

Jerry Koontz, Sprint's market development manager for indirect channels, says the alliances combine the strengths of both organizations to deliver differentiated IP solutions to the end customer through the vendors' respective channel partners. "We each bring strengths and competencies to the table and that leads to increased efficiencies," he says. "The partner has the opportunity to leverage the combined competencies of both organizations to sell the total solution to the customer, and the partner has greater control of the account as a result of offering an end-to-end solution."

VARs earn residual revenue from Sprint services. "Hardware margins have continued to erode so this is a natural fit and a good opportunity for the partners to grow their business," says Koontz.

Ingram Micro, a value-added distributor, has signed an agreement to offer Sprint services and Cisco hardware to its VARs, and acts as a master agent for Sprint. "The whole thing got started with our resellers, who mostly come from the datacom side, leaving the transport piece up to the end user to get themselves, missing out on recurring revenue," says Sally Stanton, vice president and general manager of emerging channels, Ingram Micro.

"So we said this was a great opportunity. One of the things we focus on is helping our resellers deliver a complete solution," Koontz says.

Sprint plans for more joint relationships. "You'll see the emergence of more wireless solutions in the offerings, Sprint is taking a leadership position in rolling out 3G, and that will be integrated into the solution sets," says Koontz.

"Sprint's efforts with these networking giants is coming none to soon, as research conducted in 2000 showed strong interest among enterprise (more than 1,000 employees) decision-makers to purchase LAN solutions directly from a telco, with 65 percent of responses," says Colin Nelson, a research analyst in business market segmentation for In-Stat/MDR. "This sentiment likely remains true, even in today's changed economy."

Accordingly, other convergence-driven deals are proliferating. Cisco launched a bundle with AT&T Corp.'s T1 Internet access, for sale through Florida-based VAD Tech Data Corp. It contains a residual commission opportunity on the AT&T service. Tech Data also expanded its distribution agreement with Avaya Inc. to include converged voice and data solutions for small- and midsized businesses (SMB). Qwest and Nortel signed a multiyear contract to bundle Nortel products with Qwest services in IP VPN and IP telephony areas, for enterprise customers. The alliance gives business partners on both sides access to each other's offerings.

"It really helps address some of the profitability concerns in the channel as well because of the annuity," says Chuck Robbins, Cisco's vice president of U.S. channels. "We're really trying to address a market in transition from a convergence perspective, so we're actively trying to build these programs and opportunities."

While VARs dabble in commission structures, agents are finding the need to add value by becoming familiar with other aspects of their customers' business besides transport. "If you start to look at this, the value of the channel partner hasn't been so much the technology but has been more being that solutions partner for a business," says Comstore's Heinzen. "The real value is do they understand their customer's business, because if they do it's a continuing relationship and part of that continuing relationship is to apply technologies that make sense.

"You need to be adding some value to that bandwidth in some form or another, either through managed services or through taking a different perspective where you're looking at your customer's network."

The classic agent model is a dying breed, says Levitin. "Everyone's trying to increase sales in this economy and there are opportunities out there and they all involve systems integration in one part or the other," he explains. "The agents just selling voice are going to have a really hard time."

Craig Schlagbaum, vice president of channel sales for the enterprise hosting business unit at NTT/Verio Inc. counsels agents to look for something of their own they can bring to the table. "Agents need to find a way to add value that doesn't solely relate to the selling of a service, but have their own managed services," he says. "I think you'll see in the next couple of years continued compression on the commission payments that are being paid out by these carriers. The channel comes in on the value-added side by being consultative in nature and being able to provide additional value-added services that go beyond just the infrastructure the carrier provides."

The Verio business partner program includes agents, referral agents that get a one-time fee and resellers. "Companies that augment our services with their own contributions are winning," says Schlagbaum. "The value-added solution provider is not just going to sell, but will provide other value to the end user, and agents have been gradually adding their own solutions to make sure they stay in front of that change paradigm."

Before and After Snapshots

As agents and VARs begin to play in each other's sandboxes, the creation of a converged partner is underway. The new channel partner fits the profile of an integration expert with experience in voice and data, but with value-added service offerings and specializations to set them apart in a highly competitive environment. These partners become solution providers more than a representative of any one company.

"There's a shift in the selling approach," says Peres. "Those that sell in a converged environment are not your traditional voice or data people, even though there will be a percentage of those."

The trend, he says, it toward the development of a converged partner. "It's someone that understands not just data but the converged aspect of data, voice and video, the nomenclature and application deployment and way of selling in the voice world."

Along with the technical understanding comes a shift in business model. "Where do the margins come from and what percentage of your business comes from what types of revenue streams?" says Peres. "They're going to have to change the mix of how they make their money and have probably around 40 to 50 percent coming from hardware, at least 35 to 40 percent form softer, professional services-related revenue, in maintenance, support, design. Plus, it's not inexpensive to learn about a whole new technology base, and it's an investment these guys have to make in transformational activities."

Verio's channel is populated with several partner types, including telecom agents, managed service providers, application developers and VARs. "Unlike a traditional RBOC or carrier, our focus is on hosting, a solution that incorporates hardware, software, IP and managed services," says Schlagbaum. "All of those areas consist of value-adds, and that's where different species of channel partners come into play.

"Agents are going to jump into the VAR model or partner with other VARs where the combination of value-added services is the best solution for the customer. Partners will be looking to move up the stack, away from the traditional telecom services and toward the more value-added ones," he adds.

The resulting increased competition in the indirect channel, combined with the arrival of new partner types selling telephony services and hardware, like Web integrators and managed service providers, will mean that some traditional partners just won't make the cut, industry execs say. "Not everyone will be successful in the converged world," says Peres. "We're trying to minimize the mortality rate, but there's a lot of consolidation and there will be casualties."

Cisco launched its specialization program last year, and to date almost 4,000 partners have specializations. "The downward pressure in the market has been immense," says Peres. "Specialization has helped them differentiate themselves and win the limited business that's out there, because the marketplace is requiring more technical expertise and specialization."

To keep up with the IP transformation trend, channel partners have a lot to learn. The change paradigm is challenging for VARs and agents. "System integration takes a lot of knowledge -- there are so many PBXs and key systems and carriers and there are issues of terminology and forms and switches -- even the simplest voice and data integration takes a lot," says Levitin. "Training is the biggest issue -- but the product of the future is one pipe and it's voice, data and video over IP."

The Converged VAR Revenue Mix
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The Converged Partner Model
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